International Project Financing – Building DRI Plants through Midrex UK
International Project Financing: long-term financial structures and arrangements allowing a buyer to borrow money to fund large capital projects rather than using its own resources. Many buyers now expect and sometimes demand such assistance from their suppliers and contractors. Meeting these client requirements requires planning, a clear strategy, certain expertise and working with the right entities, partners and financial institutions.
One of the most challenging aspects of developing large capital projects can be assisting in, facilitating and helping to arrange long-term project financing with attractive terms – and a MIDREX® Direct Reduction Plant certainly fits that description. Long-term borrowing allows a client to defer paying for a project until it is completed and operating, so that earnings can be used to repay the loans. As a result, financing has become a major consideration in developing international projects. Today’s reality is that plant buyers often expect process suppliers, such as Midrex, to include access to financing as part of their proposals.
Financing alone likely will not win a contract; however, being unable to assist with financing can result in the loss of a project – and financing can play an essential role in effectuating a project contract quicker. Commercial banks are the primary source of international project and contract financing, which can range from simple, straight-orward syndicated bank loans to much more advanced forms of project or limited recourse financing requiring guarantees, project sponsor involvement, off-take agreements and hedging arrangements. However, commercial bank financing can be limited with respect to the terms, conditions and tenor (repayment period) allowed, often not matching what the client requires. Also, overseas lending can be risky, and banks don’t like taking long-term political or commercial risks.
One of the principal internationally recognized and much used long-term financing models, especially for large international projects, is Export Credit Agency (ECA) financing. ECAs are government organizations set up to promote, facilitate and support the export of goods and services and provide support for long-term financing of capital projects. ECAs provide banks with the ability to mitigate the risks of long-term repayment, thus allowing them to provide more advantageous loan financing terms.
Since the financial “crash” of 2008-09, ECA financing has remained the main go-to model for buyers, borrowers and project sponsors wanting to fund and finance large cross border contracts and projects. All the major ECAs and banks involved in this sector continue to be busy working on and closing out increasing volumes of transactions. Many ECAs are expanding and developing the range of products and support they provide to include working capital schemes, bond support and insurance and local currency financing. The Japanese banks are very active in the ECA scene. The total annual volume of ECA supported business is on the order of $400 billion worldwide.
For Midrex, the ability to assist its clients in this area is a vital ingredient in the services it provides. Working with and through its United Kingdom subsidiary, Midrex UK Ltd, Midrex actively assists its clients in accessing ECA supported long-term financing.
THE DECISION FOR LONDON
Midrex UK was established in 2009 to assist Midrex clients in accessing the financing expertise and abilities offered by the UK and the City of London. These include international project and commercial bank financing expertise and accessing ECA support through UK Export Finance (UKEF) – formerly known as the Export Credits Guarantee Department (ECGD). Midrex UK was the first permanent Midrex office located outside the USA. A team of Midrex sales, marketing and procurement professionals, in coordination with Midrex’s owner, Kobe Steel Ltd., helped establish the office and recruit Mike Jasper to head the operation. Jasper was selected for his experience in financing cross border capital equipment sales and projects while working for international banks based in London. As Director of Midrex UK, he has transitioned from being a banker providing export financing to an exporter who works with global suppliers and buyers of capital equipment and the banks which finance them.
UKEF provides both sovereign guarantees for commercial bank loans and direct lending. The guarantees enable banks to provide very attractive lending terms. There are two major requirements for accessing UKEF support: the exporter must be a UK registered company and there must be a scope of supply from UK manufacturers and vendors. Midrex UK, a registered UK company with offices in London, fulfills the first requirement and is the mechanism for satisfying the second one by sourcing a UK scope of supply. Thus, Midrex UK works with UKEF in assisting clients in obtaining UK ECA guarantees and loans.
LGOK HBI-3 – THE FIRST PROJECT
ECA financing processes and arrangements often follow a separate, although parallel route to a project’s commercial and technical negotiations This was the case with the LGOK HBI-3 Project in Russia. In 2009, Midrex UK notified UKEF of the potential for the project and kept them informed of developments. UKEF supported Midrex UK with letters of support, indications of terms and conditions, general advice and direction and direct communication with the client, Metalloinvest. In addition, UKEF and Midrex UK worked with the appointed agent bank, SMBC, and with the Austrian ECA, OeKB. Midrex’s project consortium partner, Primetals Technologies, headquartered in Austria, was seeking OeKB support.
In 2012, Midrex and Metalloinvest signed the plant supply contract. Subsequently, UKEF approved a guarantee for Metalloinvest’s loan from a consortium of banks. The loan tenor and interest rate were very competitive. LGOK HBI-3 was started up in March 2017 and has performed well. As the first project to utilize Midrex’s financing capabilities, it has proven to be a success. The concept, model and modus operandi worked; Metalloinvest accessed what it considered to be vitally important long-term ECA support and significant supply orders were placed with UK companies. The UKEF loan facility proceeded relatively smoothly and now has moved into the repayment phase.
A WIN-WIN SCENARIO
The UK government is very supportive of Midrex UK’s work in securing ECA support. Success in securing MIDREX contracts and UKEF support results in orders placed for UK goods and services. As part of the due diligence leading to start-up of the London office, Midrex worked with various UK suppliers to ensure that the right scope of goods could be procured from the UK and that they would be of the required quality standards.
Midrex UK now has an established group of trusted, reliable UK vendors which will continue to grow and expand.
As a direct result of the financing of LGOK HBI-3, led by Midrex UK and supported via UKEF, purchase orders worth tens of millions of US dollars were placed with UK-based manufacturers, suppliers and service providers across several different sectors and industries.
Those companies – and other UK companies subsequently identified – are now on the Midrex qualified and approved vendors list, meaning that they are likely to be used for other global projects independent of ECA support. UK vendors have bid on and secured Midrex purchase orders on other, non Midrex UK-related, DRI projects, such as Tosyali and AQS in Algeria. This further demonstrates how UKEF and Midrex working together benefits the UK, as well as Midrex and its clients.
Three UK vendors provided equipment for the shaft furnace, reformer and heat recovery system. Four other companies provided services including packing, freight forwarding and engineering inspections. The contracts ranged from $15,000-$50,000 for the services to $8-12 million for the large equipment packages.
The Midrex purchases helped some of the UK companies to maintain their existing workforces. One of UK sub-contractors said that the Midrex purchase order was of a sufficient value and for an amount of work that, when combined with other orders on its books, allowed it to hire several additional staff and increase the number of apprentices it takes on each year. For another of the smaller service provider companies, the order for packing and boxing led to them receiving additional, stand-alone business from one of the main UK sub-contractors with which they worked on the Midrex order.
ONLY THE BEGINNING
The success of the ECA financing of LGOK HBI-3 will produce further opportunities for Midrex UK and UK vendor involvement. Many clients see ECA financing as an integral part of their internal project planning and bid processing and reviewing procedures. Therefore, the ability of Midrex to assist clients with such matters is more important than ever before. Midrex UK’s assistance and the availability of UKEF support help Midrex compete with very large international process technology suppliers.
Several past projects and current ones throughout the world have shown interest in possible ECA financing support. Some have been just inquiries; some have been detailed and involved lengthy discussions; and on one or two occasions, only the deferral of the project itself has precluded another UKEF supported contract being concluded. LGOK HBI-3 was Midrex UK ’s first ECA project, but it certainly won’t be the last.
The Midrex UK team in London works closely to support Midrex and Kobe Steel, most notably in the areas of sales, contracts, project financing and risk mitigation. It also continues to develop and expand relationships with providers of project, commercial bank and ECA financing to better utilize their skills, knowledge and expertise. This enables Midrex to continue to be the world leader in all things related to direct reduction: technology development, plant supply and aftermarket support.
Midrex UK was Midrex’s first permanent over-seas location established to assist potential MIDREX Plant owners in developing and financing their projects. In 2011, Midrex opened an office in Shanghai, China, followed in 2012 by an office near Delhi, India. With these strategically located sites, Midrex is well positioned to further expand the reach of direct reduction.